Is excessive bullish optimism behind Bitcoin’s drop below $60K?

Is excessive bullish optimism behind Bitcoin’s drop below $60K?

Bitcoin’s futures premium hit its highest level in 5 months, but was this the primary reason for BTC’s fall below $60,000?

Bitcoin (BTC) has a long history of forming local tops when events that are anticipated by the market occur. The recent Bitcoin exchange-traded fund (ETF) launch on Oct. 19 was no different and led to a 53% monthly rally to an all-time high at $67,000.

Now that the price has briefly fallen below $60,000, investors are attempting to understand if the 10% correction was a healthy short-term profit taking or the end of the bull run. To determine this, traders need to analyze BTC’s previous price activity to evaluate the possible similarities.

Bitcoin price at Coinbase in USD. Source: TradingView

Notice how all of the above events were largely anticipated, even though some did not have a precise announcement date. For example, Bitcoin’s futures-based ETF’s Oct. 19 initial trading session was preceded by SEC’s Chair Gary Gensler’s statement on Aug. 3 that the regulator would be open to accepting a BTC ETF application using CME derivatives instruments.

It’s possible that investors had previously positioned themselves ahead of the ProShares Bitcoin Strategy ETF launch and a look at BTC’s derivatives markets could possibly provide more insight into this.

The futures premium was not “exaggerated”

The futures premium, also known as the basis rate, measures the price gap between futures contract prices and the regular spot market. Quarterly futures are the preferred instruments of whales and arbitrage desks. Although it might seem complicated for retail traders due to their settlement date and price difference from spot markets, their most significant advantage is the lack of a fluctuating funding rate.

Some analysts have pointed to the “return of the contango” after the bais rate reached 17%,which was the highest level in 5 months.

In a normal situation, futures markets of any kind (soy, S&P 500, WTIl) will trade at a slightly higher price versus the regular spot market. That happens mainly because the investor needs to wait until the contract expires to collect his payout, so there’s an opportunity cost embedded, and this causes the premium.

Bitcoin 3-month futures annualized premium. Source: laevitas.ch

Let’s assume one does arbitrage trades, aiming to maximize the funds held in USD. This trader could buy a stablecoin and get a 12% annualized yield using decentralized finance (DeFi) or centralized crypto lending services. A 12% premium on the Bitcoin futures market should be deemed a ‘neutral’ rate for a market maker.

Excluding the short-lived 20% peak on Oct. 21, the basis rate remained below 17% after a 50% rally month-to-date. As a comparison, on the eve of Coinbase’s stock launch, the futures premium skyrocketed to 49%. Therefore, those naming the current scenario as somehow excessively optimistic are just wrong.

Liquidation risks were also not “imminent”

Whenever buyers are overconfident and accept a steep premium for leverage using futures contracts, a 10% to 15% price drop could trigger cascading liquidations. However, the mere presence of a 40% or higher annualized premium does not necessarily translate to an imminent crash risk because buyers can add margin to keep their positions open.

As the main derivatives metric shows, a 10% drop from the $67,000 all-time high on Oct. 20 was not enough to cause any sign of worry from professional traders as the basis rate stood at a healthy 12% level.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

  • Bitcoin
  • Ethereum
  • Tether
  • Cardano
  • Polkadot
  • Binance coin
  • Dogecoin
Scan to Donate Bitcoin to 194astnfvj2nr6izGJFwG9ebRqNU7ynQYY

Donate Bitcoin to this address

Scan the QR code or copy the address below into your wallet to send some Bitcoin

Scan to Donate Ethereum to 0xe5853a1d08b3ea0bb69276b0e40cdf858968d822

Donate Ethereum to this address

Scan the QR code or copy the address below into your wallet to send some Ethereum

Scan to Donate Tether to 0xe5853a1d08b3ea0bb69276b0e40cdf858968d822

Donate Tether to this address

Scan the QR code or copy the address below into your wallet to send some Tether

Scan to Donate Cardano to DdzFFzCqrhsu1xWeeGai3gbgsbrFP26zPaVrCJqqF286carQJmAkTitRQSUCLhYLpKCotroRRNpKj7YcnAJQqpSfsHHdj8nUaitPvH4j

Donate Cardano to this address

Scan the QR code or copy the address below into your wallet to send some Cardano

Scan to Donate Polkadot to 155rGKVEanCxpi5EqGh8yh1AkGpm6bVUa7RQNydA38KzbhNu

Donate Polkadot to this address

Scan the QR code or copy the address below into your wallet to send some Polkadot

Scan to Donate Binance coin to bnb136ns6lfw4zs5hg4n85vdthaad7hq5m4gtkgf23

Donate Binance coin to this address

Scan the QR code or copy the address below into your wallet to send some Binance coin

Tag/Note:- 105346725
Scan to Donate Dogecoin to DKN9sscVgSBVyG7f9PYJq2D3BhWK5ffUmK

Donate Dogecoin to this address

Scan the QR code or copy the address below into your wallet to send some Dogecoin


Credit: Source Link

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More

Privacy & Cookies Policy
WP Twitter Auto Publish Powered By : XYZScripts.com